A year ago Japan ignored its budget deficit critics and lowered its top
personal tax-rate to 50% from 65%, its corporate rate eased to 41%
from 46%, while tax burdens on land sales, capital gains and financial
transactions were also reduced. Almost immediately, the Japanese yen and the stock
market took off like a rocket. After nearly ten years of recession, Japan's economy is
now showing important recovery signs.

Just last week, Germany announced a similarly Reaganesque supply-side policy. With
an economy bogged down by sub-par 2% growth, and a 10% unemployment rate,
German Chancellor Gerhard Schroeder responded to the political embarrassment of five
consecutive state election defeats with an abrupt economic policy u-turn that lowers the
top personal rate to 45% from 53%, reduces the lowest personal tax-rate to 15% from
24%, drops the corporate rate to 25% from 40% (thereby putting it below the U.S.
corporate rate of 35%, and eliminates the corporate capital gains tax.

As a result, economic incentives to work and invest will improve by 17% for individuals
and 25% for businesses. Look for this to propel the German economy forward at a much
faster growth rate. And it will be a capital formation and investment-led recovery, with no
inflationary implications.

Meanwhile, large German companies will now find it profitable to make tax-free sales of
their equity cross-holdings of other German firms, thereby reforming the interlocking
corporatist system that for many decades has blocked entrepreneurs from gaining new
capital for innovative and job-creating new business start-ups.

The U.S., for its part, had better not rest on its laurels. In 1999, foreign stock markets
outperformed the U.S. Might foreign economic growth also soon outperform us?

Sizable pro-growth tax cuts in Germany and Japan could threaten an erosion of U.S.
competitiveness, infer weakness in the King Dollar reign that has held down inflation,
with a risk of financial outflows from the U.S. stock market. In the global race for capital,
international investors seek the highest inflation-adjusted rate-of-return, after-tax. Market
discipline is relentless, and the winning countries will be those with the lowest tax-rates
and the steadiest currencies.

The U.S. is still the most deregulated economy, with flexible labor markets and capital
markets' breadth, depth and resiliency that are the envy of the world. What's more, after
the Y2K-linked technology investment spree, the U.S. will maintain its Internet economy
lead for years.

However, to preserve its standing as the world's number one economic power,
Washington policymakers should be taking additional steps to nurture 21st century
technology advances, encourage entrepreneurship and expand the current prosperity
rate. Instead of overspending, large budget surpluses should be converted into
broad-based marginal tax-rate reduction, expanded 401(k) and IRA-type savings
accounts and reform of Social Security through personal retirement accounts.

The spread of supply-side tax policies around the globe is a welcome event; stronger
world growth is a positive-sum development that will raise living standards everywhere.
But indefensible standpat Congressional inaction ignores another Reagan principle: the
strongest possible economy at home is essential to our national security interests
abroad.